Finance 3716 lsu Chapter 2

B) statement of sources and uses of cash

9) Which of the following is NOT a financial statement that every public company is required to produce?

A) long-term liability

A 30-year mortgage loan is a ________.

D) $3.8 billion

A company has a share price of $22.15 and 118 million shares outstanding. Its market-to-book ratio is 4.2, its book debt-equity ratio is 3.2, and it has cash of $800 million. How much would it cost to take over this business assuming you pay its enterprise value?

C) a patent for a drug held by the company

A company that produces drugs is preparing a balance sheet. Which of the following would be most likely to be considered a long-term asset on this balance sheet?

B) revenue received for the delivery of items that have not yet been delivered

A delivery company is creating a balance sheet. Which of the following would most likely be considered a short-term liability on this balance sheet?

C) that the company has lost a class action suit brought against the firm by its employees and is expected to have to pay a large amount of damages

A firm whose primary business is in a line of regional grocery stores would be most likely to have to include which of the following facts, if true, in the firmʹs management discussion and analysis (MD&A)?

A) It will be depreciated over time on the income statement and subtracted as a capital expenditure on the statement of cash flows.

A manufacturer of plastic bottles for the medical trade purchases a new compression blow molder for its bottle production plant. How will the cost to the company of this piece of equipment be recorded?

B) The sale will be added to Net Income on the income statement but deducted from Net Income on the statement of cash flows.

A printing company prints a brochure for a client and then bills them for this service. At the time the printing companyʹs financial disclosure statements are prepared, the client has not yet paid the bill for this service. How will this transaction be recorded?

B) Investors believe the companyʹs assets are not likely to be profitable since its market value is worth less than its book value.

A public company has a book value of $128 million. They have 20 million shares outstanding, with a market price of $4 per share. Which of the following statements is true regarding this company?

A) Since net working capital is negative, the company will not have enough funds to meet its obligations.

A small company has current assets of $112,000 and current liabilities of $117,000. Which of the following statements about that company is most likely to be true?

B) as an outflow under investment activities

A software company acquires a smaller company in order to acquire the patents that it holds. Where will the cost of this acquisition be recorded on the statement of cash flows?

B) Fixed asset turnover ratios indicate that firm A generating fewer sales for the assets it employs than firm B.

Above are portions of the balance sheet and income statement for two companies in 2008. Based upon this information, which of the following statements is most likely to be true?

D) current liability

Accounts payable is a ________.

B) It would be an addition to property, plant and equipment so it would be an investing activity.

Allen Company bought a new copy machine to be depreciated straight line for three years for use by sales personnel. Where would this purchase be reflected on the Statement of Cash Flows?

B) current asset

Cash is a ________.

A) Company A is less likely than Company B to have sufficient working capital to meet its short-term needs.

Company A has current assets of $42 billion and current liabilities of $41 billion. Company B has current assets of $2.7 billion and current liabilities of $1.8 billion. Which of the following statements is correct, based on this information?

C) $1.67

Consider the above Income Statement for CharmCorp. All values are in millions of dollars. If CharmCorp. has 4 million shares outstanding, and its managers and employees have stock options for 2 million shares, what is its diluted EPS in 2008 ?

C) The ability of Xenon Manufacturing to sell its goods and services for more than the costs of producing them fell between 2008 and 2009.

Consider the above Income Statement for Xenon Manufacturing. All values are in millions of dollars. Calculate the gross margin for 2008 and 2009. What does the change in the gross margin between these two years imply about the company?

C) The efficiency of Xenon Manufacturing has significantly fallen between 2008 and 2009.

Consider the above Income Statement for Xenon Manufacturing. All values are in millions of dollars. Calculate the operating margin for 2008 and 2009. What does the change in the operating margin between these two years imply about the company?

A) $0.50

Consider the above Income Statement for Xenon Manufacturing. All values are in millions of dollars. If Xenon Manufacturing has 20 million shares outstanding, what is its EPS in 2008 ?

B) $2.2 million

Consider the above statement of cash flows. If all amounts shown above are in millions of dollars, what were AOS Industriesʹ retained earnings for 2008?

B) It would have $2,925,000 less cash at the end of 2008

Consider the above statement of cash flows. In 2008, AOS Industries had contemplated buying a new warehouse for $3 million, the cost of which would be depreciated over 10 years. If AOS Industries has a tax rate of 25%, what would be the impact for the amount of cash held by AOS at the end of the 2008?

D) by issuing debt

Consider the above statement of cash flows. What were AOS Industriesʹ major means of raising money in 2008?

D) All of the above are true.

Consider the above statement of cash flows. Which of the following is true of AOS Industriesʹ operating cash flows?

D) 2.35

Convex Industries has inventories of $218 million, current assets of $1.4 billion, and current liabilities of $504 million. What is its quick ratio?

D) 1.35

GenCorp. has a total debt of $140 million and stockholdersʹ equity of $50 million. It also has 26 million shares outstanding, with a market price of $4.00 per share. What is GenCorpʹs market debt-equity ratio?

C) total sales - cost of sales

Gross profit is calculated as ________.

D) The company has experienced a significant increase in its leverage.

If the above balance sheet is for a retail company, how has the companyʹs leverage changed between 2007 and 2008?

D) The company has increased the risk that it will experience a cash shortfall in the near future.

If the above balance sheet is for a retail company, what indications about this company would best be drawn from the changes in quick ratio between 2007 and 2008?

C) The companyʹs net income in 2008 was negative.

If the above balance sheet is for a retail company, what indications about this company would best be drawn from the changes in stockholdersʹ equity between 2007 and 2008?

A) The company is having difficulties selling its product.

If the above balance sheet is for a retail company, what indications about this company would best be drawn from the changes in the balance sheet between 2007 and 2008?

A) $330,000

In 2009, an agricultural company introduced a new cropping process which reduced the cost of growing some of its crops. If sales in 2008 and 2009 were steady at $30 million, but the gross margin increased from 2.8% to 3.9% between those years, by what amount was the cost of sales reduced?

A) 1.59%

Manufacturer A has a profit margin of 2.2%, an asset turnover of 1.7 and an equity multiplier of 5.0. Manufacturer B has a profit margin of 2.5%, an asset turnover of 1.2 and an equity multiplier of 4.7. How much asset turnover should manufacturer B have to match manufacturer Aʹs ROE?

D) The off-balance sheet promises to repurchase assets should have been disclosed in management discussion and analysis (MD&A) or notes to the financial statement.

One way Enron manipulated its financial statements was to sell assets at inflated prices to other firms, while giving a promise to buy back those assets at a later date. The incoming cash was recorded as revenue, but the promise to buy back the assets was not disclosed. Which of the following is one of the ways that such a transaction is deceptive?

A) $1.03

Refer to the income statement above. Assuming that Luther has no convertible bonds outstanding, then for the year ending December 31, 2006 Lutherʹs diluted earnings per share are closest to ________.

B) $1.03

Refer to the income statement above. For the year ending December 31, 2006 Lutherʹs earnings per share is closest to ________.

D) $135.9 million

Refer to the income statement above. Lutherʹs earnings before interest, taxes, depreciation, and amortization (EBITDA) for the year ending December 31, 2005 is closest to ________.

A) 11.61 %

Refer to the income statement above. Lutherʹs net profit margin for the year ending December 31, 2005 is closest to ________.

C) 20.36%

Refer to the income statement above. Lutherʹs operating margin for the year ending December 31, 2005 is closest to ________.

A) 17.43 %

Refer to the income statement above. Lutherʹs return on assets (ROA) for the year ending December 31, 2005 is closest to ________.

C) 123.56 %

Refer to the income statement above. Lutherʹs return on equity (ROE) for the year ending December 31, 2005 is closest to ________.

B) Firm B

The above data is for four regional trucking firms. Based on price-earnings ratios, which firmʹs stock is the best value?

B) Net property, plant, and equipment would fall to $116 million, and total assets and stockholdersʹ equity would be adjusted accordingly.

The above diagram shows a balance sheet for a certain company. All quantities shown are in millions of dollars. How would the balance sheet change if the companyʹs long -term assets were judged to depreciate at an extra $5 million per year?

A) It takes on average about 4 weeks to collect payment from its customers.

The balance sheet and income statement of a particular firm are shown above. What does the account receivable days ratio tell you about this company?

C) United States

The exchanges in which of the following countries or regions do NOT accept the International Financial Reporting Standards set out by the International Accounting Standards Board?

C) common stock, paid-in surplus, and retained earnings

The major components of stockholdersʹ equity are ________.

B) to disclose the financial implications of any off-balance sheet transactions

The notes to the financial statements would LEAST likely be used for which of the following purposes?

D) auditor

The third party who checks annual financial statements to ensure that they are prepared according to Generally Accepted Accounting Principles (GAAP) and verifies that the information reported is reliable is the ________.

B) 10-K

U.S. public companies are required to file their annual financial statements with the U.S. Securities and Exchange Commission on which form?

D) It requires that senior management and the boards of public companies attest to the effectiveness and validity of their financial control process.

What are the requirements of section 404 of SOX?

B) the difference between sales revenues and the costs

What is a firmʹs gross profit?

D) all of the above

What is a firmʹs net income?

A) Valuable assets such as the companyʹs reputation, the quality of its work force, and the strength of its management are not captured on the balance sheet.

What is the main problem in using a balance sheet to provide an accurate assessment of the value of a companyʹs equity?

D) It makes it easier to compare the financial results of different firms.

What is the main reason that it is necessary for public companies to follow the rules and format set out in the Generally Accepted Accounting Principles (GAAP) when creating financial statements?

C) the amount of deferred tax liability held by the company

Which of the following amounts would be included on the right side of a balance sheet?

C) Assets - Current liabilities = Long-term liabilities

Which of the following balance sheet equations is INCORRECT?

C) to provide a means for interested outside parties such as creditors to obtain information about a firm, with an overview of the short- and long-term financial condition of a business

Which of the following best describes why a firm produces financial statements?

C) The assets must equal liabilities plus stockholdersʹ equity because stockholdersʹ equity is the difference between the assets and the liabilities.

Which of the following best describes why the left and right sides of a balance sheet are equal?

A) a medical supply company that provides very precise instruments at a high price to large medical establishments such as hospitals

Which of the following firms would be expected to have a high ROE based on that firmʹs high profitability?

D) a grocery store chain that has very high turnover, selling many multiples of its assets per year

Which of the following firms would be expected to have a high ROE?

D) It includes cash inflows from services rendered.

Which of the following is NOT a reason that the income statement does not accurately indicate how much cash a firm has earned?

A) interest expense

Which of the following is NOT an operating expense?

B) corporate taxes

Which of the following is NOT considered to be an operating expense on the income statement?

D) the statement of activities

Which of the following is NOT one of the financial statements that must be produced by a public company?

D) by forcing companies to audit financial statements they release

Which of the following is NOT one of the ways that the Sarbanes-Oxley Act sought to improve the accuracy of information given to both boards and shareholders?

B) It adds all non-cash entries related to a firmʹs operating activities.

Which of the following is a way that the operating activity section of the statement of cash flows adjusts Net Income from the balance sheet?

A) The firm is growing.

Which of the following is the LEAST likely explanation for a firmʹs high ROE?

D) Readers of even fraudulent financial statements can spot signs of a firmʹs financial health, if those statements are read fully and with care.

Which of the following is the main lesson that analysts and investors should take from the cases of Enron and WorldCom?

D) The balance sheet reports liabilities on the left-hand side.

Which of the following statements regarding the balance sheet is INCORRECT?

A) The income statement shows the cash flows and expenses at a given point in time.

Which of the following statements regarding the income statement is INCORRECT?

A) debt-equity or equity multiplier ratio

Which ratio would you use to measure the financial health of a firm by assessing that firmʹs leverage?

D) Share price is a quantity related to equity holders, while operating income is an amount that is related to the whole firm.

Why must care be taken when comparing a firmʹs share price to its operating income?

C) by raising its reported earnings

WorldCom classified $3.85 billion in operating expenses as long-term investments. How would this make WorldComʹs financial statements more attractive to investors?